The journalist and expert on nonprofit tax law talks to Michael E. Hartmann about Congressional interest in and public discourse about exempt organizations, limited-liability corporations, donor-advised funds, and watchdogs.
Paul Streckfus is editor of the EO Tax Journal, a daily e-mail update of information, with commentary and analysis, for practitioners and scholars of exempt organizations (EO) tax law. It is thus a limited, but an important and influential, audience—especially to philanthropy and the nonprofit sector. In addition to being informative and insightful, the journal is itself important and influential, as well.
Streckfus began his career in the EO Division of the Internal Revenue Service (IRS), after which he’s covered EO and related issues as a journalist and analyst for decades since.
Below is the second of two parts of an edited transcript of a conversation that Streckfus was kind enough to have with me last week. In it, we discuss Congressional interest in and public discourse about EO issues, limited-liability corporations (LLCs), donor-advised funds (DAFs), and watchdogs.
The conversation’s first part—in which we talk about his career, the IRS and how it’s changed, the continuing and new challenges it faces, and his journal—is here.
Hartmann: You were speaking earlier in Part 1 about the lack of enforcement capability and skittishness at the IRS about aggressively investigating exempt organizations. How many EOs are no longer exempt by virtue of an IRS decision, say, annually?
Streckfus: Very few. One of the problems is basically the IRS approves about 99% of the applicants that apply for tax-exempt status. Unfortunately, it’s basically become a rubber-stamp approval process at the IRS. That’s one of my concerns, that all these organizations are being approved and we really don’t know if they qualify for tax exemption or not.
Hartmann: In addition to having an independent enforcement body, what else could be done? We try to keep track at The Giving Review of what could perhaps be done to basically alter the laws regarding the sector in general, most of which has to do with taxes. What could be done short of the, I’ll say, bold proposal to have an independent enforcement body? I think you’ve in the past floated the idea of getting rid of § 501. I mean, that would also solve a lot of problems, wouldn’t it? But on the menu of options to handle these challenges, what else would exist?
Streckfus: One side of the coin is for a change of EO tax law and have Congress step in as they did in 1969 and other times and actually make some major changes. The other side, of course, would be for the IRS to get more funding for EO regulation. I think just about everybody in the sector agrees that the IRS should have more funding because most well-run organizations of integrity do not want to have the bad guys out there causing them embarrassment.
Hartmann: What do you think the prospects of that occurring anytime soon are? This has been something urged by many for decades. Is there any prospect of success in securing more resources for the IRS?
Streckfus: Well, one could hope, but as far as addressing these issues, I don’t think much. Senator [Charles] Grassley is one of the few on the Hill who has been interested in the EO area in the past. He will no longer be in charge of the Senate Finance Committee. It looks like Mike Crapo of Idaho will take his place. No one is aware of whether he has any interest in the EO area. Sometimes a scandal will force that interest. Oregon Senator Ron Wyden and Grassley worked well together on EO matters, except for the Tax Cuts and Jobs Act provisions. How Crapo and Wyden will work together, who knows?
The expectation is that the investigations that Grassley has currently going on—one on tax-exempt hospitals and the other on syndicated charitable conservation easements—are going to be wrapped up as he departs. Crapo may bring in new staff and have other interests, so nobody’s expecting much focus on EOs from Senate Finance in the next Congress.
I personally have found the efforts of the House Ways and Means Committee disappointing. [Chairman] Richie Neal has shown little interest in EOs in the last couple of years.
On the Hill, there really doesn’t seem, with Grassley stepping out, that there’ll be much interest. Usually, you need a champion. I don’t know if you remember way back, Texas Congressman Wright Patman, who pushed for EO reforms in the 1969 Tax Reform Act. I think you need to get some influential member of Congress who wants to take on the issue of studying exempt organizations. But today, nobody has really stepped forward, so I don’t see much happening in the next couple of years in Congress unless some big EO scandal hits the front pages.
Hopefully, the EO functions at the IRS will get a little more funding, but the IRS is so starved it’s hard for the Commissioner to justify giving the EO functions more money. Even if the new Congress increases IRS funding, it’ll probably go into income-tax compliance, which I think most people would say, yes, that makes sense.
Hartmann: Might one have thought there’d be some interest, given the politicization of (c)(3)s? But you’re saying, no, there’ll be skittishness to even look into that. No more Wright Patmans, even though on both sides of the aisle, questions are often raised.
Streckfus: Regarding what constitutes political activity, Congress has actually banned the IRS from pursuing new regulations, even though they’re in desperate need for some guidance. So the IRS has its hands tied.
Hartmann: So if going with “the Wild West” characterization, it goes off into the horizon.
Streckfus: With the (c)(4)s, it certainly is. It’s completely out of control, but both political parties and their supporters are now guilty of playing loose with the rules. We mentioned the FEC. They’re not playing any role. Since the IRS got its head cut off with the so-called tea party scandal, Commissioner [Charles] Rettig is not going to tell his people, let’s audit (c)(3)s and (c)(4)s and have Congress chop us into pieces, so the IRS has retreated from the field of battle.
Discourse about EOs, LLCs, DAFs, and watchdogs
Hartmann: You mentioned before when talking about the EO Tax Journal, you figured you’d keep it at the niche level, keep it basically narrow—not a negative term there. Would there be some worth in having wider discussion of these issues? I guess that assumes people might be interested, but there are drawbacks to the narrowness of this discourse, aren’t there? If so, what are they and what could be done about that, if anything?
Streckfus: A number of professors have addressed some of the EO issues. Of course, even professors admit no one in power pays much attention to their articles. At least they help them get tenure. If you’re interested, there are a numberof articles that are on various EO problem areas, but nothing ever gets done. Some, of course, say that’s good.
Hartmann: How about the creation of LLCs [limited-liability corporations] by, I guess, mostly quite wealthy givers? That solves problems in that it they’re buying their way out of any even potential regulation, right? Is that a good thing or a bad thing? What of LLCs, if that becomes a bigger deal?
Streckfus: LLCs are certainly legal and the property of those who set them up. Some of us think that the public has a stake in section 501(c)(3) charities because their donors get tax-deductibility, but the billionaires who set up LLCs aren’t asking for deductibility. So it’s hard to say that they owe us anything, although they are using DAFs [donor-advised funds] when they do want deductibility, so there is that catch.
Basically, my position is that if you’re getting deductibility, the rest of us should have some say in how you operate. I know that doesn’t go over too well, but nevertheless there is that public subsidy issue.
Hartmann: How about the DAF issue in particular? I’m thinking of the proposals from [John] Arnold and [Ray] Madoff. Might DAFs get attention from Congress, more narrowly? Should they be concerned about attention being paid them by Congress?
Streckfus: The commercial DAF sponsors must be somewhat concerned, because from what I hear, they’re spending millions of dollars on lobbyists and giving grants to win favor with national charitygroups. There’s a recent opinion article in The Chronicle of Philanthropy where the author said they’re basically trying to buy off groups like the National Council of Nonprofits and Independent Sector.
I know the groups deny that, but nevertheless the commercial DAF sponsors know they have a “Golden Goose” worth defending. While they keep their operations secret, it seems obvious that they are making a ton of money by offering DAF accounts. Against all this money being spent is me and five or six law professors. You can see this is David versus Goliath. I should note us critics don’t want to outlaw DAFs. We want them to be required to spend the money that is now being socked away (called “parking” or “warehousing”) in a timely fashion. A lack of transparency is a related issue.
Hartmann: You mentioned some independent outside groups, I guess mostly associations and so forth. Is there enough watchdogging of the sector going on? How are the watchdogs doing, on the issue of politicization or regulation or any of this in general?
Streckfus: I think they’re stuck like everybody else. Whatever we call political abuses are now being done by both Democrats and Republicans, so it’s become bipartisan abuse.
In my experience, most watchdog or “good government” groups are partisan, either left or right, catering to the interest groups that are funding them. Unless an issue is favored by their constituencies, they’re not interested. There are a few groups that attempt to be bipartisan, but they don’t get much traction or funding.
Hartmann: If somebody’s interested in subscribing to the EO Tax Journal, where do they go?
Streckfus: Our website, EOTaxJournal.com, has all the details.
Hartmann: Thanks so much for your time, Paul. We totally appreciate it.